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Asset Allocation and Portfolio Construction Ideas: Jan 2022

Time to Shuffle the Deck?

As the interest rate cycle begins to turn (the BoE raised by 25bps Wed 3 Feb to 0.50%) and with the Fed expected to start a series of hikes at its March meeting, some sectors of the U.S. equity market appear to be showing the first signs of being under pressure. Investors may think now might be a good time to reconsider the structure and responsiveness of portfolios to economic or market events. They are probably beginning to ask themselves 'How should portfolios best be positioned for a period of high inflation?' and 'What asset classes are likely to perform well if the Fed raises rates too fast and chokes off growth?’.

This selection of papers offers suggestions and potential solutions for investors facing more volatile and uncertain times. Man Group offers insights into preparing portfolios for a rising interest rate and inflationary environment, while Amundi believes integrating climate risk mitigation measures into portfolios should be a top priority for asset managers. Other papers question the diversification benefits of bonds in a traditional 60/40 portfolio, suggesting alternative assets as a potential solution, while Nuveen illustrates how combining both public and private market debt may lead to better outcomes for investors.   



Reshaping Portfolios Amid Rising Inflation: Fire and Ice 2.0 (Man Group, 2022)

Based on analysis of over 150 years of data, Man Group offers some suggestions for investors trying to steer a course through more volatile markets and who are facing rising interest rates and inflation. 

The Case for Active Equities in the U.S. (BlackRock, Dec 2021)

For compliance reasons, this paper is only accessible in certain geographies

BlackRock suggests that with a systematic active approach, using unstructured and alternative data sets, the traditional notion that active management in U.S. equities tends not to pay or is too difficult, can be swept aside.

The Best Strategies for Inflationary Times (PMR, 2021)

In this award-winning paper, the authors investigate ways in which investors might protect their portfolios from the effects of inflation. Finding that inflation has exceeded 5% five times in the last 95 years, they show which asset classes performed best during those periods. 

Video: Building better portfolios with public and private credit (Nuveen, 2022)

Nuveen’s CIO of Global Fixed Income, Anders S. Persson, offers his insight into current market conditions and suggests that combining both private and public credit can improve outcomes and enable investors to achieve their investment objectives over the long term. 

Portfolio Construction with Climate Risk Measures (Amundi, 2022)

For compliance reasons, this paper is NOT accessible in the United States

Amundi believes climate risk is among the most important considerations for portfolio managers in the next five years. This paper identifies climate risk measures in use or available among asset managers and how they are used by industry practitioners. 

Incorporating Uncertainty in Strategic Asset Allocation (GIC, 2021)

In this paper, BlackRock and GIC suggest two ways in which investors can incorporate uncertainty into portfolio construction and use alternative methodologies to build portfolio resilience.  

Active Return and Asset Allocation Modeling (Verus Investments, 2021)

Verus Investments suggests that when considering capital market assumptions, investors need to contemplate what effects an ‘active return’ element might have on such assumptions. 

Inflation-Themed Portfolio Construction Via Machine Learning (Two Sigma, 2022)

Two Sigma demonstrates how, by using machine learning, they can construct a thematic equity portfolio designed to outperform in periods of high inflation.

Asset Allocation and Private Market Investing (Alpha Architect, 2022)

In this paper, the authors design a framework that combines top-down asset allocation with bottom-up private asset investing to counter the increasing illiquidity found in private market investing. 

Digital Assets and Portfolio Allocations (Fidelity Digital Assets, 2022)

The authors of this paper see some similarities between the early 2000s when few portfolios had a commodities allocation and now, when few have an allocation to digital assets. They suggest that given the improving infrastructure, regulation and widening product suite, digital assets may see significant institutional investment flows before long. 

Reimagining the 60/40 Portfolio – An Alternative Outlook (CAIA, 2022)

CAIA suggests that, given the potential for bonds to fail to offer traditional diversification benefits, investors might be well advised to reconsider exposure to alternative investments and private markets as elements of a ‘traditional’ 60/40 portfolio.